Double Taxation Agreement Between Singapore and Indonesia
The Republic of Singapore and the Republic of Indonesia have a double taxation agreement, which came into effect from 1 January 1992. The agreement applies to all persons that are residents of one or both of the Contracting States.
A Contracting State will be either:
- The Republic of Singapore, often referred to as just Singapore
- The Republic of Indonesia, often referred to as just Indonesia
The agreement is such that it covers taxes on income from each Contracting State. Taxes on income can come from:
- Total wage amounts
- Gains from the alienation of immovable property
- Gains from the alienation of movable property
- Elements of income
Taxes which apply under the agreement are as follows:
- Singapore – Income tax, is also called “Singapore tax”
- Indonesia – Income tax, company tax, tax on dividends and royalties, also called “Indonesia tax”
Under the scope of the agreement, identical or similar taxes will have the same rules applied. When significant tax changes are made, the authorities of the Contracting State will have to notify the other Contracting State of the changes imposed.
Fiscal Domicile Under Article 4
Fiscal domicile under the agreement is often referred to as “a resident of a Contracting State.” Therefore a resident of either Singapore or Indonesia. The term does not include a permanent establishment of a foreign enterprise.
If an individual can be considered a resident of both Contracting States, then the agreement outlines the person’s status as:
- The individual will be a resident where he has a permanent home available to him. If a permanent home exists in both Contracting States, residency will be determined by the home where the center of vital interests exist.
- In cases where the center of vital interests cannot be determined, he will be considered a resident of the Contracting State where a habitual abode exists.
- Competent authorities will determine, under mutual agreement, which Contracting State the person’s fiscal domicile resides in for all other cases.
Income Sources and Information Under Article 6 – 15
Articles 6 through 15 encompasses income from numerous sources, starting with the income from immovable property. An Immovable property Income that is derived by immovable property in the Other Contracting State, or the state in which the person is not a resident, may be taxed in that State.
Immovable property, under the definition of the agreement, will also include property accessory to the immovable property, such as:
The agreement includes income from immovable property’s direct use, such as letting or any other form of use of the property. The agreement also includes income from immovable property when it is used for the performance of professional services or the land is the property of an enterprise.
An enterprise of a Contracting State will be taxed in that State unless the enterprise conducts business in the other State through a permanent establishment. In this case, only the profits which can be attributed to the other State’s permanent establishment may be taxed in that State.
Deductions can be considered when determining the profits of a permanent establishment and may include:
- General administrative expenses
- Executive expenses
The establishment will be, by law, to deduct expenses as if the business were an independent enterprise.
When the information provided to the competent authority is deemed inadequate to attribute to the permanent establishment of an enterprise, the law of that State in the determination of tax liability or by the discretion of the competent authority shall be applied.
The same methods used to attribute profits shall be used each year by year unless there are sufficient reasons to change the method. If income is dealt with separately within the agreement, provisions within those articles shall not be affected under the definition of business profits.
Income from Shipping and Transport
Income from shipping and transport which is derived from the operation of aircraft in international traffic will only be taxable in the enterprise’s Contracting State. The same rules do not apply to shipping.
Income from shipping operations in international waters may be taxed in the other Contracting State, but only of an amount equal to 50% of the income.
The same provisions apply to operations consisting of:
- A pool
- A joint business
- International operating agency
Income of Associated Enterprises
Associated income of associated enterprises may be taxed as an enterprise of a Contracting State wherein the enterprise directly or indirectly participates in the following of an enterprise of the Other Contracting State:
If the same individual participates in the management, control or capital of an enterprise in either state, certain rules apply to ensure that taxation is carried out fairly.
In either case wherein the two enterprises have commercial and financial relations which would be different from relations between two independent enterprises, taxation will be carried out as if profits were earned by two independent enterprises and taxed properly.
Essentially, the two enterprises may not, for the purpose of dodging taxes, maintain relationships for the sole purpose of not paying appropriate taxes.
Income from Dividends
Income from dividends are very complex, but the taxation agreement covers the income from dividends in-depth. When dividends are paid by a resident of one Contracting State to a resident of the other Contracting State, the dividends may be taxed in the other State.
The dividends may be taxed in the Contracting State wherein the company is a resident, but if the recipient is the beneficial owner of the dividends, the following will apply:
- Taxation may not exceed 10% of the gross amount of dividends if the beneficial owner owns 25% or more capital in the company paying the dividends.
- Taxation may not exceed 15% of the gross dividend amount in all other circumstances.
As long as Singapore is not taxing dividends in addition to taxes on profits or income of a company, the dividends paid by a resident company of Singapore to a resident of Indonesia are exempt from any dividend-related tax in Singapore.
If the dividends are subject to taxation in addition to the taxes chargeable on the company’s profits or income, the rates outlined in earlier provisions in the section shall apply.
Dividends shall arise in:
- Singapore if paid by a company resident in Singapore
- Indonesia if paid by a company resident in Indonesia
Income from Interest
Interest paid from a Contracting State to a resident of the other Contracting State may be taxed in the other State where it arises in the Contracting State. If the recipient of the interest is the beneficial owner of the interest, the interest may be taxed on the Contracting State but shall not exceed 10% of the gross amount.
Interest, which is not covered previously in the section, may be taxable only in the other Contracting State if it is paid from:
- Obligation of the Contracting State
- Loan, guarantee or credit from the Monetary Authority of Singapore or the Bank Indonesia.
Competent authorities of the Contracting States may agree on a mutual settlement for matters not covered elsewhere under Article 11 of the agreement.
The Government of a Contracting State shall be exempt from taxes on interest derived in the Other State.
Interest will be considered income which arises from all debt-claims. Business income rules will apply if the interest is paid to a beneficial owner of the interest which carries on business in both States, through a permanent establishment, and the debt-claim is tied to that establishment.
If the payer and beneficial owner of the interest have a special relationship, the amount of interest paid will be taxable as if the absence of such a relationship existed. In this case, the remaining will be taxable according to the law of each Contracting State.
That is to say that if interest is a standard 10% but due to the special relationship, interest paid is just 2%, the excess 8% will be taxed as if a special relationship did not exist.
Income from Royalties
Royalties that arise in a Contracting State and are paid to a resident of the other Contracting State may be taxed in the other State. If the recipient of the royalties is the beneficial owner, the Contracting State where the royalties arise may tax the owner in an amount that does not exceed 15% of the gross royalty amount.
Limitations on this amount must be settled by the competent authorities of both Contracting States.
Business income rules will apply when the recipient has a permanent establishment in the other Contracting State and a connection between the royalties exists.
Provisions will also apply for any proceeds that arise from the alienation of:
- Secret formula
- Copyright of scientific works
Income from Independent Personal Services
Income derived from activity in a Contracting State in which the individual is a resident will be taxed only in that State unless the resident is present for a period of 90 days out of a 12-month period in the other State.
Income that falls within this scope is taxable only to the amount that is derived in the respective state. For example, if S$10,000 was earned in Singapore over a 3-month stay by an Indonesian resident, the resident will only have to pay taxes on the S$10,000 earned in Singapore.
Income from Dependent Personal Services
Dependent personal service income which will include renumeration, wages or salaries of a resident of a Contracting State, in respect to the employment in that State, is taxable only in the state where the income is derived.
If employment is exercised in the other State, the portion of the income derived in the other State may be taxed in that state.
A resident of a Contracting State that earns income from activities in the other Contracting State will have income taxed only in the resident State if:
- The recipient does not spend a period of 183 aggregate days within the other State in a calendar year.
- The income is paid by or on behalf of a resident employer of the first-mentioned Contracting State.
- Income is not deemed to arise from a permanent establishment of the employer in the other State.
Income from Director’s Fees
Income from director’s fees, or similar payments, that are derived by a resident of a Contracting State for their capacity of work, such as a member of a board for a company of the other Contracting State, may be taxed in the other State.
Elimination of Double Taxation
Article 23 of the agreement covers the elimination of double taxation, and subject to the provisions of the laws of either Contracting State, in respect to the allowance of credit against each State’s respective tax, will be allowed to be a credit against the opposite State’s tax.
Exchange of Information Between Contracting States
Contracting States may share information as necessary to carry out the provisions of the double taxation agreement. The competent authorities of either state may share information to:
- Avoid double taxation
- Prevent tax evasion
Information that is exchanged will be “secret,” and the information can only be shared with parties, including a Court or reviewing authority, that is to enforce, assess or determine matters of taxation that are under this agreement.
The provisions found within the scope of the Exchange of Information section will not be construed to impose on a Contracting State the following obligations:
- Supply information which is not obtainable under normal circumstances and laws.
- Supply trade, business, commercial, industrial or other professional or trade secret information.
- To carry out administrative measures at variance with the laws and the administrative practice of that or of the other Contracting State.
Singapore and Indonesia both agree that the agreement will remain in force until terminated by either Contracting State. Termination of the agreement must be done through diplomatic channels and must be given in written notice on or before 13 June of a calendar year by the fifth year in which the agreement is in effect.
The double taxation agreement allows for residents of either Contracting States, whether an individual or company, to enjoy less taxes as a whole. Accountants understanding both country’s laws are optimal choices when dealing within the scope of the taxation agreement.